Don't Fret Over Inflation

CHET CURRIER Fund Watch

May 29, 2006|CHET CURRIER Fund Watch

From a long-term investor's point of view, the recent uproar over inflation in the financial markets is no cause to panic.

In the next little while the inflation statistics may look a bit worse than expected, as did the report earlier this month that U.S. consumer prices rose 0.6 percent in April instead of the projected 0.5 percent.

But if I am investing for long-term growth or a sustained stream of income through such vehicles as stock, bond and money-market mutual funds, this needn't scramble my plans. My first concern is where the deeper-down currents are going.

Much evidence says the underlying trend remains disinflationary, thanks to the powerful forces of global economic progress and new technology exemplified by the Internet. Globalization and innovation promote increased competition and productivity, both of which work to keep inflation in check.

This is an awfully simplistic view I'm propounding, isn't it? Yes, and intentionally so. To keep the kind of perspective and patience necessary to be a true long-term investor, I can't get bogged down in too much ephemeral detail.

If I focus too intently on every threat that rears its head in the day-to-day economic news, I never run out of reasons to put off risking my money in anything more variable than a Treasury bill.

A prime concern about the recent inflation news is the prospect it will induce the Federal Reserve to keep raising short-term interest rates beyond 5 percent, where the Fed's target for the overnight bank rate now stands.

OK, suppose it goes to 53/8 percent. That was precisely what it averaged from the end of 1994 through 1999 -- a period when the economy and the stock market both boomed.

Recent economic history has done its best to establish once and for all that prosperity in itself doesn't cause inflation. In the 1970s, by my quick calculations, the monthly unemployment rate averaged 6.2 percent, while consumer prices surged 7.1 percent a year.

In the 1990s, average unemployment dropped to 5.8 percent, even as the inflation rate was slashed to 3 percent.

It's become a standard complaint in recent years that official inflation statistics understate the problem: "Hey, no matter what the numbers say, everything I buy is going up!"

This is a selective perception. True as it may be lately for gasoline or plumbing services, it may miss the mark for personal computers, or coffee, or what used to be known as a long-distance telephone call.

While any individual price increase I encounter may legitimately displease me, that doesn't make it inflation. Likewise, price stability isn't defined as "everything I want at the price I want to pay."

Consider rising health-care costs. To the extent that they reflect more and fancier equipment, greatly increased malpractice accountability and other add-ons, higher medical bills arise not from inflation, but from other sources.

Or look at college tuition costs. Much of their runaway rise can be attributed to plain old increased demand -- which in turn reflects a much-enhanced real value for education in an information-based economy.

What bearing does all this have on the money-management decisions you or I make? A simple, direct one. It reminds us to keep a calm head at all times on the tricky, touchy subject of inflation, even when some of those around us may be losing theirs.

Chet Currier is a Bloomberg News columnist. He can be reached at ccurrier@bloomberg.net.